1. “Services 2000” Round Table Series WTO GATS - Relevance and Opportunities for Hong Kong Dr. Edward Tse EVP, Corporate Planning & Development Head of Greater China Cable & Wireless HKT Hong Kong Coalition of Service Industries May 19, 2000

2. 2 OBJECTIVE TODAY/CAVEAT To review findings of Services 2000 study on WTO’s telecommunications negotiations… …and draw implications for Hong Kong companies Perspectives as an industry observer, not representation of my company

3. 3 POTENTIAL DISCONTINUITIES DRIVING CHANGE Liberalization/ De-regulation – internal – external Technology

4. 4 REGULATORY CONTEXT DRIVES BASIS FOR COMPETITIVE ADVANTAGES AND STRATEGY FOR COMPANIES REGULATORY FRAMEWORK FREE RESTRICTED OWNERSHIP DEGREE OF FREEDOM PRODUCT MARKET DEGREE OF FREEDOM Banks Renminbi business Pharmaceuticals Telecom Services Agricultural Machinery Carbonated Drinks - mid-1980’s Auto Hospitals FMCG * *FMCG: Fast Moving Consumer Goods CHINA EXAMPLE

5. 5 THIS REGULATORY CONTEXT HAS DIRECT IMPLICATION ON THE COMPETITIVE BEHAVIOR OF INDUSTRY PARTICIPANTS Free Product Market Degree of Freedom Free Ownership Degree of Freedom Restricted ILLUSTRATIVE Competition dynamics Must have a formal partner? Sources of competitive advantages LowHigh Often Required for positioning/relationship Specific Need Driven By Capability Requirements Positioning/Relationship Capabilities

6. 6 WITHIN THE CONTEXT OF THE TELECOMMUNICATIONS & IT INDUSTRIES, REGULATIONS ARE EVOLVING BY COUNTRY CHINA EXAMPLE Cable TV operations Basic telecom services (wireline; wireless) ISP Data Centres Call Centres ICP ASP? Solution services Free PRODUCT MARKET DEGREE OF FREEDOM Restricted OWNERSHIP DEGREE OF FREEDOM ? Free

7. 7 LIBERALIZATION, DE-REGULATION Free Product Market Degree of Freedom Restricted Restricted Free Ownership Degree of Freedom

8. 8 THE WTO IMPACT CAN BE FAR REACHING HOWEVER, THE PROCESS TO GET THERE CAN BE PAINFUL Increase in Foreign and Domestic Enterprises Economic growth More diversified economy Capability-based competition Better infrastructure Integration into world economy Reduce tariffs More foreign presence Lower trade barrier for exports Increased Competition More Efficient Industries Larger Economy ENTRY TO WTO China Example: Potential GDP Growth Rate Increase of 0.5 to 3% per year

9. 9 COMPETITION WILL SHIFT TO MORE CAPABILITY-BASED Liberalization and regulation will increase the presence of the foreign players as well as domestic players Positioning and guanxi will diminish in importance Increased competition will lead to less margin for error Only the true capable companies will be able to survive the competition

10. 10 IN THE MEANTIME, COMPANIES MUST DECIDE ON PRIORITIES OF ENTRY MARKET READINESS - REGULATIONS Increasing Market Readiness Product Market Approach PRODUCT LIFE CYCLE Ownership Approach Penetration Time Market Attractiveness  Readiness  Growth  Size  Lifecycle + High Lower Priorities Build Capabilities Build Biz LowHigh Low Position for Entry Ability to compete Skills Geographic extension

11. 11 THEREFORE, THE WISH LIST FROM THE SURVEY IS NOT SURPRISING (1) Table 1: Wishes for telecommunications sector: by wish type Establishment Requirements23.2% Immigration and Visa19.7% Market Infrastructure to Promote Competition15.0% Information Flow and Transparency15.0% Qualification of Professional Standard13.2% National Treatment 7.7% Others 6.2% Total100% Wish categories Adjusted Response Rate Table 2: Telecommunications sector: top 10 individual wishes Description of individual wishes% of total Relax restrictions on foreign equity ownership6.2% Relax restrictions on number of operating licence6.0% Relax restrictions on scope of business activities5.8% Relax restrictions on minimum capital requirement5.6% Streamline the procedure of obtaining foreign visa5.0% Improve transparency of court ruling on business disputes4.4% Increase/eliminate the quota of foreign work visa4.2% Simplify burdensome domestic regulations3.8% Set up inquiry points for dissemination of trade related laws and regulations3.6% Enforce intellectual property rights law impartially and objectively3.4% Increase duration of stay of foreign workers3.4% Total51.4%

12. 12 THEREFORE, THE WISH LIST FROM THE SURVEY IS NOT SURPRISING (2) Table 3: Wishes for information services sector: by wish type Establishment Requirements13.4% Immigration and Visa11.5% Market Infrastructure to Promote Competition14.2% Information Flow and Transparency17.8% Qualification of Professional Standard11.3% National Treatment12.0% Others 6.1% Total100% Wish categories Adjusted Response Rate Trade Facilitation & Removing Restrictions in Other countries10.5% Table 4: Information Services sector: top 10 individual wishes Description of individual wishes% of total Set up the electronic data interchange (EDI) facilities 4.3% Relax restrictions on scope of business activities 4.2% Streamline the procedure of obtaining foreign visa 4.0% Improve transparency of court ruling on business disputes 3.8% Relax restrictions on foreign equity ownership 3.8% Simplify burdensome domestic regulations 3.2% Set up inquiry points for dissemination of trade related laws and regulations 3.7% Relax/eliminate restrictions on marketing channels available to foreign firms 3.2% Total38.2% Set up regulations related to e-commerce 4.0% Apply the same licensing requirements for both local and foreign firms 4.0%

13. 13 IN HONG KONG, TELECOMMUNICATIONS LIBERALIZATION IS SIGNIFICANT 1980 1990 2000 Jan 2000 Facilities-based competition Jan 1999 International Simple Resell - Voice 1997 International Simple Resell - Fax & Data 1998 HKTI surrendered its exclusive licence for external telecommunication Mar 1999 Mobile Number Portability 1995 Fixed Telecom Network Services (FTNS) International Value- Added Network Services (IVANS)

14. 14 HONG KONG EFFECT OF DEREGULATION IDDMobile Price Lower monthly service fees Significant drop in average IDD tariffs Competition more than 150 external services licensees Market competition stimulated by Mobile Number Portability (MNP) 6 mobile network operators Consumer Choice Free IDD calls Discount for “Frequent Call Number” Free mins for intra- network calls Free handsets VAS bundling Market size No. of Mobile Subscribers rose by 21% (Apr 1999 - Mar 2000) Penetration reached 57% as of Mar 2000 Outgoing IDD minutes increased by 72% in 1999 Sources: OFTA

15. 15 HONG KONG’S INTENSE COMPETITIVE ENVIRONMENT HAS DRIVEN COMPANIES TO BUILD CAPABILITIES AND EXPAND REGIONALLY Use Hong Kong as a test bed to build capabilities, brands, and test business models Leverage capabilities, brands, and business models to expand regionally –knowledge, experience and competitive advantages are key to success and attraction for local partners Leverage perception on “proxy to the mainland” to build international partnerships/alliances to Greater China or the region

16. 16 PARADIGM OF CAPABILITIES IS SHIFTING PHYSICAL BUSINESSES Economies of scale Segmentation Operational effectiveness INFORMATION BUSINESSES Setting and controlling standards Achieving preemptive critical mass Controlling patents and copyrights Making alliances Adapting to order-of-magnitude shifting in underlying technology every several years Shifting business boundaries and models …

17. 17 NEW BASES OF COMPETITIVE ADVANTAGES ARE UNDERPINNED BY HUMAN ASSETS Sources Of Competitive Advantages Knowledge Innovation Adaptability Flexibility International network of human capital Speed Wish List Immigration and Visa –Streamline the procedure of obtaining foreign visa –Increase/eliminate the quota of foreign work visa –Increase duration of stay of foreign workers Human Assets Battle for Talents!

18. 18 IN ANY COUNTRY, REGULATORS SHOULD ENSURE A LEVEL, TRANSPARENT PLAYING FIELD Embrace spirit of WTO –Phase-in of competition is already a key component –Makes foreigners “believe” - and thus inject skills/capabilities quickly Do not try to mastermind the outcome –Technology will evolve –“Grass roots” innovation is essential Create a level playing field –Technology neutral –Do not disadvantage the incumbent (universal service obligates, etc.) Protect intellectual property rights Ensure transparency in regulations and implementation

19. 19 FINAL WORDS Technology/telecommunications is rapidly shifting the basis of competition across industries and will be a key engine for economic growth in the region WTO is a key enabler to exploit this discontinuity through increased competition and innovation Consumers and customers will benefit Hong Kong companies aspiring to win this new game will: –Have to develop integrated strategies aligned to specific needs by country –Leverage their own capabilities and build local and global partnerships as necessary, to expand capabilities –Build strong local people base as a pre-requisite for success –Act quickly and proactively to adapt to change

20. 20 BACK UP

21. 21 LONGER TERM, THE TELECOM’S LANDSCAPE WILL CHANGE DRAMATICALLY, BRINGING CHALLENGES EVERYWHERE FROMTO Fixed line telephony Voice long distance Mobile voice communication Multiple high-speed broadband offers competing for the “last mile” - basic telephony as an “add on” Data-Driven Networks - voice, no matter what the distance, for free Shift to wireless broadband… …enabling proliferation of mobile devices and applications Demand Technology

22. 22 WTO ONLY DIRECTLY IMPACTS THE INTRODUCTION OF COMPETITION; A COMPLETE LIBERALIZATION PROGRAM REQUIRES MORE STEPS TELCO REFORM LEVERS ENABLE COMPETITION DEVELOP INDUSTRY 1. Market OpennessDegree to which market is open to new players 2. Privatization/Ownership Restrictions Degree to which ownership is private and unrestricted 3. Dominant carrier restrictions Degree to which the rules are developed and enforced on dominant carrier to stop anti-competitive behavior 4. Interconnection and equal access Degree to which interconnection is allowed at all points of the network (co-location) and degree to which equal access is granted 5. Pricing Degree to which tariffs are liberalized 6. Customer selection Degree to which customers have the flexibility to switch across difference service providers (e.g. number portability and dialing parity) 7. Spectrum management Degree to which spectrum frequency is efficiently allocated to allow maximum benefit to consumer/nation 8. Independent and capable regulator Degree to which the regulator is independent from Ministry and is capable of developing and enforcing competition rules Note: *Universal service as a regulatory lever is not addressed here INTRODUCE COMPETITION THRUST OF WTO REMAINING REGULATORY LEVELS

23. 23 HONG KONG’S INTENSE COMPETITIVE ENVIRONMENT DRIVES COMPANIES TO BECOME PREPRARED FOR REGIONAL ENTRY STRATEGY APPLICABLE PRODUCT AREAS ACTIONS Leverage Successful: – Business Models – Distinctive Skills Quickly build alliances with local content players Bring “business model” and/or capabilities that help ensure mutual success VAS: –Consumer (e.g. portals, malls, market makers) –Commercials (e.g. web hosting, system integration) Mobile: state of the art segmentation, pricing, network planning skills Integrate China into regional network play Quickly build bridges those building “Networks of the Futures” Integrate systems, offerings as soon as possible High speed access and transport